State Board of Equalization Chairwoman Updates Hueneme City Council on Cannabis Taxation Laws

With the passage of Proposition 64 last November, the California State Board of Equalization (BOE) now faces the daunting task of creating a state sales tax and a banking framework for the recreational and medical cannabis industry.

The upside is that even for smaller California cities like Port Hueneme, the potential for creating a marijuana sales tax dangles in front of city councils like a ripe orange on a tree.

California State Board of Equalization Fiona Ma made a presentation to the Port Hueneme City Council’s Cannabis ad hoc committee on Tuesday, January 17

To provide the city guidance, Port Hueneme’s Mayor Pro Tem Jim Hensley and the Port Hueneme City Council invited California State Board of Equalization (BOE) Chairwoman Fiona Ma to speak before the council’s Cannabis Ad Hoc Committee on Tuesday, January 17 at city council chambers. The meeting was open to the public.

For Port Hueneme, a cannabis sales tax is an important issue. Hensley stated that the city plans to license cannabis retailers starting January 2018. This to beef up its dwindling sales tax base. But to do so, the city needs to be kept in the loop on the progress of current state cannabis tax regulations.

Hensley points to the reality of marijuana sales happening in the county. “Dispensaries are already making deliveries all over Oxnard and Port Hueneme,” he noted. “People are requesting a license and asking for a background check. Marijuana sales are flourishing all over the state.”

For the council, understanding and following the law will better ensure that the product sold in the city is safe and secure and that any taxation of marijuana sales by the city will go smoothly.

As Hensley pointed out: “By the end of this year, the state’s going to bring down rules for taxes, which is important to us because we don’t have a big source of sales tax, so we have to reach out and find out some new ways to develop taxes.”

But as chairwoman Ma explained, California has a long road ahead to establish both taxation and banking procedures. While state sales tax is collected on medical marijuana sold in California, its enforcement has been lax and any banking regulations for handling sales and taxation are still in the early stages.

For example, when Ma was first elected to the BOE, she learned that no one on the board knew the actual sales tally for marijuana sold in the state.

“When I got elected to the board in November 2014,” she said, “I found out that the board was charged with collecting sales tax for marijuana dispensaries, which is unusual because in California, medical and pharmaceuticals are not taxed. So my first question to my agency was: ‘How much do we collect?’ And everyone looked around and said, ‘We don’t know.’”

She pushed the BOE to answer that question, and what they discovered was surprising. First, because of the risk of self-incrimination, many dispensaries did not want to self-report. As it turns out, the BOE made that part easy. “When you take out a seller’s permit with BOE,” said Ma, “there is no check box that says you are a dispensary.”

Not surprisingly, after digging around and calculating potential marijuana sales, the BOE found that only about a quarter of the licensed dispensaries paid sales tax. “We think we collected about 25% of the taxes due,” Ma explained. “In 2014, we collected about 44 million dollars from about 25% of the dispensaries. Then I started to ask: Where’s the other 75%?”

Ma found several answers to this question.

Because cannabis was classified federally as a schedule I drug, the banks were not legally allowed to support the industry. This meant that most of the dispensaries in the state operated on a cash only basis.

Second, professionals were not working with the industry because if they were affiliated with marijuana sales, they could lose their licenses. Thus lawyers, CPAs, bookkeepers, and enrolled agents were not actually assisting these businesses.

Finally, even though medical marijuana sales had been legal in the state for twenty years, the BOE had provided scant proactive education to let the industry know that they had a responsibility to pay their taxes.

Ma and the BOE have been working on this last issue for two years. “We have been doing a robust education effort to try to get more folks to comply,” she stated. “And now with the passage of proposition 64, one of the required check boxes will have to be: ‘Do you have your seller’s permit?’ and ‘Have you been paying your taxes?’”

The biggest problem for the cannabis industry, however, what Ma referred to as the “elephant in the room,” is solving the banking question.

“We estimate that 70% of the industry here in California does not bank,” said Ma. “This means there’s a lot of cash floating around. The ones that do have banking, they’re formed under different types of LLCs or partnerships, definitely not with the word ‘cannabis’ in it.”

For anyone who wants to publicly fund and operate a cannabis business, putting the word in their business title can mean big trouble. If banks learn that an operator is selling marijuana, their bank accounts can be shut down, as well as most of their family members, and sometimes it extends even to their home mortgage, their line of credit, and their student loans. “Everything gets affected because of this banking issue,” said Ma.

Ma has been working for the last 18 months trying to try to get the federal government to loosen some of their requirements for this industry. A lack of banking procedures is also problematic from the BOE’s perspective as the agency that collects state sales tax.

“From a tax collection standpoint,” Ma observed, “it’s very hard to audit a company that only deals in cash because there are no bank statements, no credit card statements, nothing to verify sales.”

Ma is hopeful that this problem can be solved. California State Treasurer John Chiang recently formed a cannabis banking working group consisting of 15 members. Their first meeting was in December. The group’s goal is to have six meetings, and then have the working group try to figure out how to provide legal banking processes for the cannabis industry.

Ma pointed out that it’s already happening in Washington State. “They have three banks and two credit unions that are publicly banking the industry,” she pointed out. “The reason they got approval from federal regulators is because they have a very robust licensing scheme. They basically follow the same model as their alcohol licensing, which is very strict. You must get FBI background checks, fingerprinting, tons of documents that you need to submit. Because their licensing processing is so robust, the banks felt comfortable enough to take these customers.”

As a result, 90% of the state’s marijuana licensees are paying their taxes and fees electronically. This means most retailers now have some sort of banking access.

Ma believes that the federal government will recognize the business model that the state of California sets up. If the laws enacted by the state are strictly enforced, she believes that all players in the marijuana business, including cities and counties, will remain free to legally collect and distribute sales taxes. Most important, the banking industry will be there to support everyone’s business transactions.

“For twenty years, the BOE has been collecting state sales tax on marijuana sales,” Ma concluded. “Why can the state BOE accept marijuana taxes, then go to a bank to deposit taxes? The answer is that because we are a state agency, we are accepting and depositing co-mingled funds. So presumably, if you are a local jurisdiction and you are also collecting cash, then you will be collecting and co-mingling and therefore able to deposit money into the banks.”

As for the city receiving taxes from marijuana retailers, Ma believes that the new Trump administration will be a strong advocate for states’ rights. “I think that’s good news for California,” she said. “We are going to be the biggest state in the nation now for marijuana sales, and since we’ve offered medical cannabis for twenty years, and, starting in 2018, we are going to have the first licenses for recreational cannabis, there will be players at all different levels here in California.”

In other words, if California banks can be convinced to handle cannabis money, for cities like Port Hueneme, it’s game on.

(L to R): City Council representatives Mark Hensley, Jonathan Sharkey, and Will Berg, and police chief Robert Albertson held an open forum to update the public about the current state of California’s cannabis laws and banking regulations.

Tim Pompey, a freelance writer who has done lots of local affairs and entertainment/cultural writing, lives in Oxnard. Tim is also a fiction writer (Facebook Page). You can learn about his books on Amazon.com: amazon.com/author/booksbytimpompey.

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